Auto Fitting GARCH OscillatorOverview
The Auto Fitting GARCH Oscillator is a sophisticated volatility indicator that dynamically fits GARCH (Generalized Autoregressive Conditional Heteroskedasticity) models to the price data. It optimizes the parameters of the GARCH model to provide a reliable measure of volatility, which is then normalized to fit within a 0-100 range, making it easy to interpret as an oscillator. This indicator helps traders identify periods of high and low volatility, which can be crucial for making informed trading decisions.
Key Features
Dynamic GARCH(p, q) Fitting: Automatically optimizes the GARCH model parameters for the best fit.
Volatility Oscillator: Normalizes the volatility measure to a 0-100 range, indicating overbought and oversold conditions.
Customizable Timeframes: Adapts to various chart timeframes, from intraday to monthly data.
Projected Volatility: Provides options for projecting future volatility based on the optimized GARCH model.
User-friendly Visualization: Displays the oscillator with clear overbought and oversold levels.
Concepts Underlying the Calculations
The indicator leverages the GARCH model, which is widely used in financial time series analysis to model volatility clustering. The GARCH model considers past variances and returns to predict future volatility. This indicator dynamically adjusts the p and q parameters of the GARCH model within a specified range to find the optimal fit, minimizing the sum of squared errors (SSE).
How It Works
Data Preparation: Calculates the logarithmic returns and lagged variances from the price data.
SSE Optimization: Iterates through different p and q values to find the best GARCH parameters that minimize the SSE.
GARCH Calculation: Uses the optimized parameters to calculate the GARCH-based volatility.
Normalization: Normalizes the calculated volatility to a 0-100 range to form an oscillator.
Visualization: Plots the oscillator with overbought (70) and oversold (30) levels for easy interpretation.
How Traders Can Use It
Volatility Analysis: Identify periods of high and low volatility to adjust trading strategies accordingly.
Overbought/Oversold Conditions: Use the oscillator levels to identify potential reversal points in the market.
Risk Management: Incorporate volatility measures into risk management strategies to avoid trades during highly volatile periods.
Projection: Use the projected volatility feature to anticipate future market conditions.
Example Usage Instructions
Add the Indicator: Apply the "Auto Fitting GARCH Oscillator" to your chart from the Pine Script editor or TradingView library.
Customize Parameters: Adjust the maxP and maxQ values to set the range for GARCH model optimization.
Select Data Type: Choose between "Projected Variance in %" or "Projected Deviation in %" based on your analysis preference.
Set Projection Periods: Use the perForward input to specify how many periods forward you want to project the volatility.
Interpret the Oscillator: Observe the oscillator line and the overbought/oversold levels to make informed trading decisions.
Marketvolatility
ATR GerchikAverage True Range ( ATR ) is a technical analysis indicator that measures market volatility. It is a moving average of the true range over a period of time. Originally developed by a market technician J. Welles Wilder Jr. in the 1970s, ATR was utilized to measure the average volatility of an asset over a given time period. Wilder realized that measuring volatility using only closing prices would not yield accurate results, necessitating a more complex system. To calculate the Average True Range, one must first determine the True Range (TR).
ATR calculation procedure:
1. Determine the true maximum - this is the highest of the current maximum and yesterday's closing price of the day.
2. Determine the true minimum - this is the smallest of the current minimum and yesterday's closing price.
3. Determine the true range - this is the distance between the true maximum and minimum.
4. Exclude extremely large candles and extremely small ones from the obtained true ranges.
5. Calculate the average for the selected period based on the remaining range.
6. Calculate the percentage of the current True Range relative to the average ATR value for the previous period.
Description:
If you analyze market movements, you will find that 75-80% of the time, an instrument moves only 1 ATR per day. Understanding this is crucial; for example, if an instrument has already moved 80% of its daily range, it is not advisable to enter a new position. This concept is similar to a car's fuel tank; if the tank is nearly empty, the car won’t go far. Many indicators include anomalous candles in their ATR calculations, which can yield unreliable results and lead to incorrect decisions. This is why many traders prefer to calculate ATR manually.
However, the Gerchik ATR indicator accounts for anomalous candles by filtering out extremely large and small candles. Users can set the coefficient for the upper and lower filtering thresholds. Experiment with these settings to find your criteria for filtering out abnormal candles. Personally, I filter out candles larger than 2x ATR and smaller than 0.5x ATR. Additionally, this indicator displays the consumed “fuel” of the instrument for the entire day and the current percentages, so you don’t have to calculate the distance traveled manually. The indicator also visually displays the boundaries of the average true range on the chart, enabling quick and informed decisions. When building any strategy, relying on the average true range movement is essential.
This extended version of the indicator includes a NATP indicator (Normalized ATR), a variation of the ATR that measures volatility as a percentage of the current price. It helps gauge market volatility levels and assists traders in making informed decisions.
Procedure for calculating NATR (Normalized ATR):
1. Determine the true maximum - the higher of the current high and the previous close.
2. Determine the true minimum - the lower of the current low and the previous close.
3. Determine the true range - the distance between the true maximum and minimum.
4. Filter out extremely large and small values from the obtained true ranges.
5. Calculate the average for n candles based on the remaining ranges.
Additionally in this version:
- Change table position
- Added NATP indicator
- Option to turn off the table description
- Option to turn off some indicators in the table
- Indication of the selected period in the table
- Changing coefficients for filtering abnormal candles
- Display of the number of invalid candles in the selected period
- Inclusion of labels with full ATR, NATR, candle range, and validity information
- Color-coding labels based on validity
- Selection of colors for valid and invalid candles
- Adjustable label size
- ATR graph display on the chart
- Customizable graph style, line thickness, and fill color
Detailed description:
Displays colored labels with detailed information. Labels can be color-coded based on validity and selected color. The text color will automatically adjust if a lighter color is chosen.
Panel of available settings
Graphic styles:
Line ATR graph style
Cross line ATR graph style
Step line ATR graph style
Step line diamond ATR graph style
Cross ATR graph style
Columns ATR graph style
Circles ATR graph style
Area ATR graph style
Cross area ATR graph style
Key Features:
- Anomalous Candle Filtering: Excludes extremely large and small candles for more reliable ATR values. Set filtering thresholds independently as coefficients.
- Consumed Fuel Indicator: Shows the percentage of the ATR consumed, aiding quick assessment of remaining movement potential.
- Daily Timeframe Focus: Designed for daily charts for accurate long-term analysis. The indicator is displayed on the daily timeframe if enabled, hiding it on lower timeframes.
- Visual Indicator Boundaries: Displays indicator boundaries on the chart with customizable styles and settings.
Practical Applications:
ATR helps traders predict potential future price movements, aiding in setting Stop Loss and Take Profit targets. Using ATR for SL/TP placement helps avoid market noise. ATR can also form an exit strategy by placing Trailing Stop Losses.
- Entry and Exit Points: Determine optimal entry and exit points by assessing market volatility and potential price movement.
- Stop-Loss Placement: Calculate stop-loss levels based on ATR to ensure appropriate placement, accounting for current market volatility.
- Trend Confirmation: Use ATR percentage consumption to confirm trend strength and decide on trade entries or exits.
Examples of Use:
- Trend Following: During strong trends, ATR identifies increased volatility periods, signaling potential breakouts or reversals.
- Range Trading: In ranging markets, ATR highlights low volatility periods, indicating consolidation and potential breakout zones.
Average True Range ShiftThis indicator builds on the idea of the Average True Range (ATR) as a way of measuring volatility. It uses two different ATRs to show a shift in market volatility.
It is mainly composed of two moving averages of ATR. One fast moving, which looks back at the previous 5 periods. One slow moving, which looks back at the previous 21 periods. Both ATRs have been normalized (show percentage instead of an absolute amount). The third component of this indicator is the histogram that is created by subtracting the slow moving average, from the fast moving average.
By having two ATRs of different lengths, traders can see how short term volatility compares to long term volatility, and how it is shifting over time. When the fast-moving crosses above the slow-moving, it will show a positive value on the histogram, meaning that short term volatility is increasing and higher than normal. When it crosses below, it will show a negative value on the histogram, meaning that short term volatility is decreasing, and lower than normal.
There are a variety of ways to utilize this indicator, and it will work in most markets. I find it is best to analyze macro market conditions on daily charts and above, rather than micro intraday moves.
